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Can Twitter Maintain Profitability in 2018?

Breaking down Twitter's revenue and margin commentary to get a better picture.

Twitter(NYSE:TWTR) made good on its goal of reaching GAAP profitability in the fourth quarter last year, producing earnings per share of $0.12. In its letter to shareholders, management wrote that it expects to be GAAP profitable over the full year of 2018.

But Twitter's path to profitability was to cut costs across the board. Management says there's no more room to cut costs. In fact, management says it expects expenses to grow this year, but to remain in line with revenue growth. Revenue growth, management noted, will look more like 2016 than 2017 in terms of quarter-to-quarter fluctuations. The company notably retooled its advertising products last year.

So, given management's comments, what can investors expect from Twitter on both the top line and bottom line in 2018?

An overview of management's comments

First-quarter adjusted EBITDA guidance of $185 million to $205 million.

First-quarter adjusted EBITDA margin guidance of 33% to 34%.

"We think that the sequential growth rates for total revenue ought to look a lot more like 2016 than they did like 2017."

"We think that our expenses ought to more closely align with revenue than they have in the past."

"Margins ought to look a lot more like 2017."

"The opportunity for margin expansion comes from higher revenues, which sometimes you see from seasonal strength."

Getting the revenue number

While Twitter didn't provide exact revenue guidance for the first quarter, we can back into a number from its adjusted EBITDA guidance.

$185 million at a 34% margin gives us a low end of $544 million.

$205 million at a 33% margin gives us a high end of $621 million.

Note, the range is much wider than most companies would guide for, since it's a derivative from two other guidance ranges. For reference, analysts expect Twitter's first-quarter revenue to come in at $604 million, which is in the upper part of the range. Given Twitter's momentum, that estimate makes a lot of sense.

Next, let's look at Twitter's 2016 sequential revenue growth to get an idea of what to expect this year.

Period

2016 Revenue

Sequential Growth

Implied 2018 Revenue*

Q1

$594.5 million

N/A

$604 million**

Q2

$602 million

1.1%

$610.6 million

Q3

$615.9 million

2.3%

$624.7 million

Q4

$717.2 million

16.4%

$727.1 million

Total

$2,530 million

NA

$2,566 million

*Based on growing at the same sequential rate as 2016.**Based on analysts consensus expectations.Data source: Twitter financial filings.

It's worth noting total revenue for the year falls short of current analysts expectations using this analysis. On average, analysts are expecting $2.69 billion in revenue for Twitter this year, growing more than 10% year over year. The $2.57 billion figure represents growth of just 5%.

Improving margins

Management also noted that expense growth ought to track revenue growth for the year. But if expenses grow at the same rate as revenue, net margin doesn't improve at all. That makes the comment somewhat confounding in the face of expectations for GAAP profitability for the full year.

Twitter may have faced increased expenses in the second quarter last year, however, as it wound down some ad products. In addition, the margin comparison for the first quarter ought to be much easier to overcome considering the 8% year-over-year revenue decline last year. So it would make sense for Twitter to post meaningful margin improvement in the first half of the year, with the second-half margin looking more similar to last year.

If Twitter can improve its margin from negative 16% in the first half of 2017, it could turn a profit for the full year of 2018. Investors probably shouldn't expect Twitter to show GAAP profitability through the first half of the year, however, as it's seasonally weaker than the back half. Remember management's comment -- "margin expansion comes from higher revenues."

Overall, management's comments provide encouragement that Twitter will post its first ever year of GAAP profitability. They're considerably more conservative than Wall Street, however, when it comes to revenue growth and net margin outlook. That makes Twitter very risky for investors that are looking to buy the stock now after its fourth quarter results sent the share price rocketing higher.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.

Author

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He consumes copious cups of coffee, and he loves alliteration. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinals mania ... Follow @admlvy